Can macroprudential policy control house prices?

One of the features of the credit crunch era has been something that would not have been expected beforehand which is that house prices in more than a few countries are running hot. If you think about it house prices should have fallen in response to the credit crunch as banks and economies retrenched and wages fell as I was discussing only yesterday. But something else was thrown into the mix which was the monetary easing of central banks where interest-rates were cut and plunged us into the ZIRP or Zero Interest Rate Policy era. This has been followed in the last year or so by NIRP as some countries have taken the policy interest-rate negative.

Also we have seen a range of extraordinary monetary policies such as Quantitative Easing which in the UK is being kept at £375 billion. Also if we look at the UK experience the Funding for Lending Scheme began in the summer of 2012 and look what even Jon Cunliffe of the Bank of England thinks happened next and the emphasis is mine.

But over the past three years, as banks’ funding costs have reduced and as competition in the mortgage market has intensified, on average mortgage interest rates have fallen by 2 percentage points.

We learned only on Tuesday the impact of that on house prices in the UK.

UK average house prices increased by 6.1% over the year to September 2015, up from 5.5% in the year to August 2015

Now as the economy has been in a recovery phase for a bit you might think that such a situation is okay but then you have to address this.

In September 2015, the UK mix-adjusted house price index increased 0.3% from the previous record level witnessed in August 2015 to reach a new record of 219.8 (Figure 2). The UK index is 18.5% higher than the pre-economic downturn peak of 185.5 in January 2008.

This has been driven but the cuts in official interest-rates which were followed by moves to push mortgage interest-rates even lower and the moves went on and on until house prices were driven higher. After all it wasn’t real wage growth was it?

However earlier this month Nemat Shafik of the Bank of England told BBC radio this.

Interest rates ‘not tool for housing market’

Contradiction city

There is the obvious issue that since 2008 the Bank of England has been doing exactly that! Perhaps the ability to overlook such things was not only a factor in her being parachuted in as a Deputy Governor but also in the award of a Dame hood  in June. Also as she is one of those who keeps telling us that the Bank of England is about to raise interest-rates why not simply let them that part of their job?

Dame Shafik has an alternative for house prices

It has tools to do things like put limits on the amount of indebtedness that households can take on, it can reduce banks’ ability to lend very risky loans, so for us we need to use the right tools for the right problem.

Okay but perhaps as she sits at the next meeting she could tell Jon Cunliffe who told us a different story.

I do not think that the role of the macroprudential authority should be to control asset prices including house prices.

It reminds me of one stage of the UK desert campaign in the second world war which came under the category “order,counter-order, disorder”.

Macroprudential policy

Back in the day this used to be called credit controls many of whom we scrapped back in 1979 when exchange controls were ended and we moved away from such policies. The problem back then was the economy was jerked forwards and backwards and indeed distorted as institutions moved to get around and subvert restrictions which were then changed. It was not a triumph although advocates of what is called macropru often ignore that.

In the UK we have seen an example of it when the Bank of England introduced MMR or the Mortgage Market Review in April 2014. This tightened the rules for lending at high income multiples and ended self-certification mortgages which had acquired the rather descriptive title of “liar loans”. There was an obvious initial issue for some as described by Mortgage Strategy.

The biggest problem created by the MMR has been mortgage prisoners. These are borrowers who took out a mortgage when affordability rules were more relaxed and are now unable to get a deal in the new environment.

How are things going?Not so well according to the Guardian at the end of October.

Sub-prime mortgages, widely blamed for causing the 2007-08 financial crisis, are making a surprise comeback in the UK, with several new lenders launching home loans for people with poor credit histories.

This bit raised a wry smile.

Matt Andrews, managing director of Bluestone Mortgages, said: “We don’t like the term sub-prime – it implies these customers are somehow inferior to prime borrowers, which they are not.

We see above two of the fundamental problems of macropru which happened in the past. One group is disadvantaged in getting credit and at the other end of the spectrum we see lenders getting around the rules and a group who not so long ago we decided shouldn’t have such easy access to credit get back in the game.

Bank of England research

A paper released this morning offers some insights into the problems of macropru.

But the effectiveness of these instruments may be compromised if banks and borrowers are able to avoid these measures via regulatory arbitrage or if the regulation is subject to `leakages’ whereby the activity migrates to institutions which are not covered by the instruments.

Those 43 words used to be covered by just one disintermediation. One issue may have been noted above as you see several of the subprime lenders above are Australian institutions.

Some macroprudential instruments – in the absence of reciprocal arrangements – cannot be applied to all financial institutions within a country.

Also there are issues with another sector which we have not heard mentioned for a while.

Much of the debate over leakages has focused on lending by ’shadow banks’ or non-bank financial institutions,

You will not be surprised to read that the paper comes out in favour of macropru overall as it would be quite an own goal otherwise. A literal personal one in a way as one of the authors works for the Macroprudential Strategy and Support Division at the Bank of England.


This is another issue for our valiant regulators as we have the issue of whether such policies are applied at the right time or whether they are always too late? We are seeing an example of this in Sweden right now where there is a house price boom which I would argue is a bubble and yet the Riksbank Minutes tell us that little has actually been done about it.

several members of the Executive Board again emphasised that there is a great need to promptly clarify mandates and tools within the area of macroprudential policy and to adopt measures to manage risks on the housing market and risks linked to household debt.

We are left with the impression that central bankers rather like the idea of the boom happening and then arriving too late like General Terry at the battle of Little Bighorn.


The problems with macropru described above are known so I can only conclude that central bankers are trying to redact them from history. As I have already pointed out this is especially odd in the UK as according to Forward Guidance rises in interest-rates are supposed to be  on their way. The hints are by now familiar “at the turn of the year” “sooner rather than later”.

There is another oddity because you see the Bank of England still has its foot on the mortgage market pedal via the Funding for Lending Scheme.

During the second quarter of 2015, the number of groups participating in the FLS Extension was 34.  Of these, 11 participants made drawdowns of £5.1bn in total. Participants also repaid £0.9bn, taking total outstanding drawings to £61.4bn.

This is supposed to be for small business lending these days but then of course it always was! Let us be nice and say it has flatlined but what about mortgage lending? From the BBC last week.

The CML said that gross mortgage lending totalled £61.4bn in the third quarter of the year. This was up 18% on the previous quarter and a 12% rise on the third quarter of 2014.

Oh and I do hope that the lending to small businesses is not a form of corporate buy to let funding. Oh buy to let! Surely that is not yet another hole in the net of our valiant macropru regulators?

So the answer to my question is no. At the moment that is because they do not want it to. Should they apply it the side-effects would quickly be so great it would be rapidly watered down or kicked into the long grass (assuming there is still some space in that crowded area). But they could at least claim to have done something…..



24 thoughts on “Can macroprudential policy control house prices?

  1. “It has tools to do things like put limits on the amount of indebtedness that households can take on, it can reduce banks’ ability to lend very risky loans, so for us we need to use the right tools for the right problem.”

    To me this sums up the reality that you mentioned in your last paragraph: there is no desire to sort out the house price bubble because everyone in charge of doing so has a vested personal interest in letting it continue. The measures given as examples by Miss Shafik are all designed to do one thing: freeze out normal people while preserving the investments made by the rich.

    Shafik is a good example of her class, and indeed of the sort of robber barons that run the IMF where I see she used to be a deputy governor. Any risk to “wealth creators” (ie, owners) is to be avoided, and any chance to redistribute wealth to the rest of us (the renters) is simply something they can not understand, like a child being asked to share their toys – “Why should I?” is the response. When a country gets into financial trouble, it’s ALWAYS because there’s not enough cash trickling up to the wise inhabitants of the castle who can see from their lofty elevation where the cash should go for maximum effect – usually this turns out to be Monaco or Switzerland somehow.

    The bubble can not be deflated because the banks and our leaders (including landlords like Cameron and Osborne) would lose money. Macropru is invoked precisely because it would simply block access to buying by anyone who needs a loan, leaving the property market to cash buyers who can then cover their costs by making the rest of us pay rent so that they can go to the beach and enjoy the benefits of a “passive income”. The strength of rental income generated by the shortages thus caused is seen as a way to bring even more corporate money into the market and thus sustain prices even as individual investment is cut back.

    In the spirit of “La Marseillaise”, I would point out that this sort of aristocratic rule – for that is what it is – often ends badly for the aristocrats.

    • Hi TW

      I found the contrast between the claims about macropru between Cunliffe and Shafik to be rather bizarre. Starting with her boasts to Parliament about her role at the IMF Shafik has been deeply unimpressive which yet again poses a question about the criteria for being made a dame.

      As to Macropru I see it as being like Forward Guidance and therefore more a PR exercise that a real policy intention.

    • ‘there is no desire to sort out the house price bubble because everyone in charge of doing so has a vested personal interest in letting it continue.’
      ‘Shafik is a good example of her class, and indeed of the sort of robber barons that run the IMF where I see she used to be a deputy governor. Any risk to “wealth creators” (ie, owners) is to be avoided, and any chance to redistribute wealth to the rest of us (the renters) is simply something they can not understand, like a child being asked to share their toys – “Why should I?” is the response. ‘
      ‘In the spirit of “La Marseillaise”, I would point out that this sort of aristocratic rule – for that is what it is – often ends badly for the aristocrats.’

      Some great pearls there TW,To quote Steve Keen,
      ‘the last time we had a debt deflation like this it ended after ten years with the second world war’.
      I’m maybe usaing that quote in a way he hadn’t intended-he was talking about stimulus if I remember correctly-but it seemed incredibly prophetic.

  2. Hi Shaun

    Great article as always.Doesn’t the FLS scheme run out in January? I expect there to be another extension in the Autumn statement next week. Maybe some tweaking of SMI.

    The ponzi must be propped up at all costs.

    • Hi Anteos and thank you.

      As to the FLS we should know soon as the past extension announcement dates were as follows “which was amended on 28 November 2013 and on 2 December 2014. ” So we can expect an announcement along the lines of this.

      “The improvement in net lending to SMEs over the past few years reflects a loosening in credit conditions for SMEs over this period, and there is some evidence of further loosening in 2015 Q2. ”

      You may note the lack of words like positive lending and growth………whereas for mortgages!

  3. oh deary me , Shaun , as time goes by I guess the Banks can see the writing on the wall and want to push the debarcle onto anyone except themselves !

    forward guidance ?

    It wasn’t me – shaggy


    • Hi Forbin

      Today we got reminded that Hector Sants had a similar role to Paul Tucker i.e kicking the can forwards into the long grass, in this instance in his FSA role of overlooking what those in charge of HBOS had done. A famous phrase needs a rewrite.

      Government of the banks, by the banks,for the banks…

  4. Let me ask a wider question. If they UK BoE had a magic button to reduce house prices which had no other side-effects, would they press it?


    If you accept this premise then ask the question: why?

    It’s because the UK is going down.

    • It is true that negative equity is a problem, not just for the owners but for the ability for areas to regenerate by attracting workers since they can’t afford to move. But when the problem was bank debt it didn’t take long for “creative” solutions to be found that went beyond interest rates and macro measures. We really are in a mess and getting out of it will be tough, but it would be nice if were at least trying instead of waiting for the bubble to burst again in the hope that everybody “important” is able to get out beforehand.

      • Ok, let’s take this thought experiment further. So I add one more button. It says “fix negative equity on it”. We let prices drop, you press the button. Negative equity gone. No side effects except one: you gotta keep prices at the new low.

        Now you have a problem. The UK *was* printing money via land to give the appearance of solvency. Now it’s not. Trade deficit is up. Money supply isn’t expanding via housing which is excluded from inflation, so the growth figures are actually telling the truth. And they are bad.

        Now what? The UK transitions to 1980s Spain but with far worse demographics?

        Our establishment aren’t stupid. This is the last leg down from empire and they are stretching it out. It’s over.

    • The reality is that they’re caught between a rock and a hard place.With the way fractional reserve lending works post the various Basels where we seen banks move from cash reserve lending to the use of capital ratios/risk weighting assets,any drop in asset values leading to negative equity would immediately lead to reduced lending which would immediately impact adversely on GDP growth.

      The reality is that that reset will one day have to occur,it’s how capitalism works.

      Unfortunately due to the way we regulate banks and due to the way banks have ramped leverage-I for one wouldn’t believe any of them when it comes to an honest assessment of their capital ratios,linked,as they are to the banks assessment of asset quality,price and liquidity.

      As you say Benfitz,the UK is in a deep hole and to laymen the solution to a deep hole problem is to stop digging.Our feudal masters disagree.

  5. Great column as usual, Shaun.
    I listened to the radio interview with Nemat Shafik. She seems to put a lot of weight on one study by Charlie Bean and colleagues in 2011, but she didn’t give a fair summary of its results. She said his simulation showed that an increase in the bank rate of two percentage points prior to the financial crisis would only have led to a 2% drop in household debt. In fact, his results showed that the real stock of credit would have been more than 5% lower in the UK in 2008Q1 if higher interest rates had been adopted. Although she was answering a question about housing price inflation she didn’t mention that the Bean study showed real housing prices would only have increased by 5.8% from 2003Q1 to 2008Q1, as opposed to their actual 41.1% increase. In fact, the simulation suggested that higher interest rates would have been substantially more effective in reducing real house price increases in the UK than in the US.
    It is true that the study also showed that real output would have grown less from 2003Q1 to 2008Q1 by 2.6 percentage points. However, Ms. Shafik didn’t provide Mr. Bean’s caveat: “These costs are significant, though still modest compared to the output falls during the recession of around 8 per cent in the United States and over 10 per cent in the United Kingdom, relative to a continuation of pre-crisis trends. So this could be an insurance premium worth paying if there was a reasonable chance that it could have prevented these falls.”
    The Bean study also didn’t consider whether any output loss due to a higher interest rate policy might not be appropriately consider malinvestments, and therefore no great loss. As Lord Forsyth said to BoE Governor Meryvn King in March 2009: ‟I understand the point that if you put up interest rates you might not have met your narrow definition of inflation target and it might have meant that there were fewer building workers employed building flats which turned out subsequently to be almost worthless.”

    • oh deary me , Andrew , I do not place much faith in Mr Charlie Bean, I glad he’s bean and gone now .

      The effort here is to figure a way out and not go over past battles life some old war horses

      I can see you’re much more skilled in this area , no insults or bad manners , but what can we do now ?

      graceful collapse of the indebted banks ?

      a gradual but persistant increase in housing stock at the lower end with a tighter lending criteria ?

      On that note it seems we’re going back to the future regards LTV and 0% deposits – I don’t think this will help in the medium term ( the long term we’ll all dead )

      Or shall we stuff the horse with more oats to feed the sparrows at the other end ?

      I look forwards to you reply , thanks


      • Forbin, the UK housing boom and bust isn’t the distant past. The run on Northern Rock was just eight years ago so it maybe is useful to go over that battle again, especially since in some ways, little has changed since then. The Bank of England still has the same target rate of inflation, 2%, and the same target inflation indicator, the UK CPI. I believe that the Chancellor of the Exchequer should change the target rate to something lower, initially 1¾%, as soon as possible, and switch the target inflation indicator to the CPI including an owner-occupied housing component based on net acquisitions. The target rate could be dropped further if the CPI measure adopted a symmetric formula instead of the existing chain Lowe formula, which would require it to be revisable over a long period, likely 24 months. This would complicate the BoE’s inflation forecasting, but would be doable. The Swedish Riksbank already does it with its own Swedish CPI.
        This would not, by itself, lead to an increase in bank rate in the current situation, but would mean that in the future monetary policy would be tighter than it has been in general in the period from 2004 forward and more responsive to house price surges.
        When you ask about loan-to-value ratios and that stuff you take me way out of my comfort zone. The only Canadian Minister of Finance Mark Carney served under as Governor of the Bank of Canada was Jim Flaherty. He was notorious for his interference with the mortgage markets, initially to stimulate housing and mortgage lending activity when David Dodge was still BoC Governor, then acting to dampen it, as a new housing boom built after the 2008-09 recession:
        Mark Carney was in the habit of being on the scene for a lot of Finance Minister Flaherty’s announcements, so you got the impression that he was doing all the heavy lifting rather than Mr. Flaherty. A lot of people wondered if what was needed was not so much one more tweaking of the mortgage market, but an increase in the overnight rate, which Governor Carney never raised again as BoC Governor once he took it to 1.0% in September 2010.
        I want to keep an open mind about macroprudential regulation, but wonder if people don’t have inflated (no pun intended) hopes for it. Do you remember when fiscal policy wonks spoke of “ fine tuning” with reverence and not with a sneer?

  6. Hi Shaun, the answer to your question is Yes although I agree there would be serious side effects which would have to be ridden out.

    By the by in terms of, er, “successful monetary policy” remember 1988 – 1990? Remember interest rates almost doubling? Remember 70,000 families per year being made homeless as they couldn’t afford the mortgage payments as we went through 1989 – 1992? Now that’s what I call immense side effects and no-one seemed to care!! It is my contention that carefully calibrated tight Macropru would have nowhere near that drastic an effect although some may be made homeless.

    Picking up some of your specific points where you allege MacroPru would fail:

    You speak of heavily indebted people who now find themselves the wrong side of the MMR, therefore cannot participate in the best new deals around. It needs to be remembered that these people decided to borrow silly amounts of money without a thought as to the possibility of rates increasing in the future and so have no-one else to blame other than themselves. It’s called “taking responsibility for your actions” something you have talked about (and which I completely agree with) on here many times in relation to the bankers. You consider this phenomenon “failure”, I consider it “successful” MacroPru ensuring new loans are sustainable.

    Another problem you identify with MacroPru is that the rules may be “gamed”, “sidestepped” etc so it doesn’t work. Tightly written MacroPru rules in Draconian style if necessary along the lines of “any institution licensed by the FSA to lend money is bound by said rules where the loaned money is used to purchase any type of asset of any description whatsover within the UK” would ensure all licensed bodies would comply even if they were based abroad.

    The MMR rules/guidance currently doesn’t go far enough and much more needs to be done around loan to value ratios being tightened and loan to income values which would of course freeze (make stable) the housing market for some years until wages caught up.

    Returning to the current era of abolished MacroPru and relying purely on Monetary Policy, how has that gone? Well, here we are!

    • Hi Noo2

      I did not expect you to agree. We can however agree that for a period macropru can do something specific such as hold the line on a loan to value maximum or income multiples. As we stand holding the line on income multiples has its problems with house prices as they are so it leaves the latter which doesn’t seem to be happening if we look at the sub-prime developments.

      UK economic history has been that it does not take too long for rules to be subverted and for disintermediation to begin. As the credit crunch has seen many things speed up I fear that too.

      I agree that some of the heavily indebted should take responsibility for what they did but also some were relative innocents in the process. They are currently being affected by a stroke of the regulators pen and the regulator the FPC has a poor record. Jon Cunliffe slaps himself on the back for the way it boosted the banks but forgets that it squeezed them before then. I am afraid that more of that is likely and from it there will be more casualties.

      As to economic theory working since the late 1970s there have obviously been serious issues such as now and the period leading up to our ERM exit in 1992 as well as 1980-82. But before then we had struggles then went to the IMF so we were rebounding from one problem which later created others.

      Back in the macropru days day we used interest-rates as well as for example MLR hit 15% in 1976. Was either choice a success……?

      • Shaun, as you may imagine I’ve just been checking historical MLR and you’ve caused me to question my post. I think I am starting to come round to agreement with your last sentence. The question is where does the solution lie?

        • How about this?
          If a bank lends irresponsibly (remember THEY are the professionals in this), and the borrower gets into difficulty, the bank pays five years’ mortgage payments of the lender. If at the end of that period, the borrower still cannot service the mortgage, then we revert to present policy.
          1) This would help the almost rigged market, where the lender has it both ways, charging high amounts of interest for higher risk, yet also demanding bigger deposits, which make failure far more likely.
          2) I am not qualified to define “irresponsible lending”.

    • ‘It is my contention that carefully calibrated tight Macropru would have nowhere near that drastic an effect although some may be made homeless.’

      A quarter/half point on IR’s would see a lot of people going underwater on a mointhly basis.The reality being that they’ve leveraged to the limit.

      Another factor is that people are quite often likely to cease making monthly repayments because the value of their house has dropped below the price they paid.I read a report on the US market post 2008 and it made a really good case for demonstrating that negative equity was a significant factor in default as rate rises.

      Therein lies the problem for the powers that be.Once asset prices drop,it’s pretty hard to stem the tide and then they start dropping because they’re dropping.A vicious circle if you will that will shatter bank balance sheets.

      Mix falling prices with IR rises and it’s a toxic mix.

      In my opinion we should have let the market reset in 2008.The crunch we’ve got coming is going to be even bigger because they didn’t

      • Hi Dutch,
        The US housing market is very different from
        the English because they don’t suffer from the great English disease – a fetish with houses for their own sake because you can, according to most British, sit in the house and count the money your making as it appreciates in value week by week.

        Most Americans view houses (correctly imo) as a home to live in. Consequently they won’t hang on to the house if they lose their jobs (welfare there is much less generous than in the UK vis payment of housing costs) as to them they aren’t losing ” a surefire quick and easy way of making money” and their home, they are just losing their home.

        That said, I agree taht in the US people are likelyu to stp making payments when they fall into negative equity as they don’t feel they’re losing much and they see it as good money after bad but the UK see’s a savibgs piggy bank instead of a house and because they believe it will go bacvk up in value they keep paying.

        I have friends and family in the US and my brother is a btl landlord. He used 2008/2009 to increase his portfolio cheaply but, interestingly, he was born in the UK and shares the English property obsession – maybe it’s something they put in the water in the UK that infects you for the rest of your life.

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